Investors were hoping that Qualcomm (NASDAQ:QCOM) would win its latest court battle as it prepares for an even bigger one. However, on Wednesday the court once again ruled against the company.
That means Qualcomm faces the prospect of having to renegotiate many of its existing licensing agreements for smartphone modem technology. Doing so would have serious repercussions for future profits and QCOM stock.
The markets were closed on Thursday for the holiday. In pre-trading, Qualcomm stock felt the impact of the latest ruling, dropping by as much as 3%.
QCOM Stock Down After Second Court Loss
Qualcomm asked a U.S. District Court judge to stay the ruling made against the company in May, when it lost an antitrust case brought by the U.S. Federal Trade Commission (FTC). That ruling caused a rout in QCOM stock. Having the ruling stayed would have bought Qualcomm time during what is expected to be a lengthy appeal process.
Both the FTC and South Korean electronics giant LG (which is currently in the process of negotiating smartphone agreements with QCOM) opposed the company’s request.
On July 3, the courts once again ruled against Qualcomm. The company must re-negotiate agreements with customers (including LG) based on fair, reasonable and non-discriminatory terms (FRAND) while it waits for its appeal to be heard. Doing so will gut QCOM’s revenue and hammer its profits. The company complained the resulting agreements would “upend” the smartphone industry and hurt it for years to come even if it wins its appeal — which is expected to take a year or more to wind through the courts.
Though Qualcomm immediately announced it is appealing this latest ruling, it’s not enough to prevent QCOM stock from taking a hit.
A Long and Winding Legal Road
As the company continues its journey through the U.S. legal system, it’s proving to be a rocky road for QCOM investors.
Investors were ecstatic at the end of April. Apple (NASDAQ:AAPL) settled its long-standing legal battle with Qualcomm, paying QCOM royalties it had withheld and signing a six-year agreement to put Qualcomm modems back in iPhones. QCOM stock rocketed 24% in a single day on that news.
Just a month later, storm clouds.
On May 21, a U.S. District Court ruled in favor of the FTC, deciding that Qualcomm violated antitrust laws and had “strangled competition.” As a result, the company would be forced to negotiate licenses for its smartphone modem patents under FRAND terms directly to rival chip makers instead of forcing smartphone makers to pay. It’s expected that doing so would reduce the royalties the company collects from the sale of a smartphone from “several dollars to pennies.”
That would have a serious impact on revenue. As a result, Qualcomm stock went into a steep drop.
It has been slowly recovering as investors gained hope that the request to stay the ruling while QCOM appealed would buy time — a year at least, before the day of reckoning — with the possibility Qualcomm would win.
The judge’s decision to deny Qualcomm’s motion hits the company just as it’s negotiating new 5G agreements with smartphone manufacturers like LG. The timing couldn’t be worse and raises the very real prospect that even if it wins its eventual appeal against the FTC, Qualcomm could be saddled with agreements that cut into its profits for years to come. That’s not great news for the company, or for QCOM stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.